At present mutual fund is one of the most important options for the investment of money. By investing in this fund instrument one can get higher returns beat inflation, and can increase wealth in the future. But what is a mutual fund?
It is a financial instrument where an investor can invest by buying the units of the mutual fund. His/her money is diversified and invested in different equities and debts by the fund manager.
As it is important to know about this concept before investing. Similarly, it is important to know about the taxes on mutual funds. If an investor doesn’t know about the tax rates and systems he or she will have to suffer a huge loss.
We all invest in mutual funds to earn returns. Mutual funds are of two types Dividends and Capital Gains. The dividend is the sum of money is paid through an investor. If there is any surplus profit & Capital gain are the money that an investor can earn by selling the funds.
A unit at a profit means more than the initial invested amount. Let’s take an example and understand capital gain. If Ram buys mutual fund units of Rs 1000 and after some time he sells it at Rs 5000. The difference in buying price and selling price which is Rs 4000 is called a capital gain.
Tax on Capital Gains and Dividends
Tax on Capital Gain on Mutual Funds in India: Capital Gains are of two types STCG (short-term capital gain ) and LTCG (long-term capital gains). But before knowing what is STCG and LTCG we should know about the types of mutual investment.
These Investments are mainly of two types Equity Mutual Funds and Debt Mutual Funds. In both cases taxation is different, Equity Mutual Funds are those mutual funds that invest more than 65%. The corpus in Equities such as shares of a company and Debt Mutual funds are those funds that invest more than 65% of their corpus in debts such as govt bonds or debts.
What is STCG?
What is STCG (short-term capital gain) and LTCG (long-term capital gain), STCG means the capital gain within a year and LTCG means the capital gain of more than a year.
Let us take an example if an investor invests in an equity mutual fund at Rs 10000 and sells it at Rs 50000 within a year it is known as short-term capital gains (STCG) and if the same is sold after a year it is known as long term capital gains (LTCG)
So now let us know about the taxation on STCG and LTCG of Equity Mutual Fund. STCG on Equity are those funds that are equity-oriented and if an investor sells his/her mutual fund within 1 year and has a capital gain the taxation will be 15% + 4% CESS ( cess is a tax charged for promoting and development of health, education, etc by the government), for example, if you buy a mutual fund at Rs 50000 at 1st Jan of 2021 and sells it at Rs 100000 at 31st Dec 2021.
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Taxation on STCG and LTCG of Debt Mutual Fund. STCG of Debt Mutual Fund means if an investor invests in a debt and redeems it within 3yrs it will be known as Short Term Capital Gain on Debt will be treated as Income
Similarly, LTCG of Debt means if an investor holds his investment for more than 3yrs; here the taxation is 20% with Indexation benefits. But what are Indexation benefits?
Indexation means recalculation of the buying price of past transactions by taking in the inflation index according to the method published by the govt of India if an investor invest Rs 1 lakh 4yrs ago and now its value is Rs 11 lakh here LTCG is Rs 10 lakh and has to pay tax on Rs 10 lakh which will be very much and have to pay a large amount but with indexation.
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The present value of Rs 1 lakh is recalculated which was invested 4 yrs ago. Let us assume that Rs 1 lakh will be Rs 4 lakh by recalculating using CLI (cost of living index). So the LTCG of Rs 11 lakh will be Rs 7 lakh ( Rs 11 lakh – Rs 4 lakh).
After indexation, so the tax will only be charged on Rs 7 lakh.
Tax on Dividends in India. Earlier no taxes are paid on dividends. Before the dividend is paid Dividend Distribution Tax (DDT) was charged by the company. But after 1st April 2020 govt of India said that no DDT will be charged on dividends.
But TDS will be charged through the company before the dividend is paid if the dividend is more than Rs 5000. Otherwise, if it is less than Rs 5000 no TDS will be charged. After receiving the dividend, he/she will have to pay income tax on it. It will be shown as Income From Other Sources and have to pay tax according to his or her Income Tax Slab Rate.
